N-ERGY Views on Capacity Market Suspension and its Implications on the Energy Market

16th November 2018

The General Court of The Court of Justice of the European Union ruled against the Capacity Market (CM), a UK government electricity scheme in favour of Tempus Energy for discriminating against Demand Side Response and clean energy.

The ruling came out yesterday on the 15th of November as a surprise. The implications of the judgement can be severe as CM enters a ‘standstill period’ that halts all CM auctions and stops all payments to existing agreements. T-1 and T-4 auctions for delivery years 2019/20 and 2022/23 will be postponed. Meanwhile, BEIS is seeking a separate state aid approval from the European Commission (EC) for a ‘one-off replacement’ for T-1 and might run a T-3 auction next year instead of the T-4.

The court believes the state aid is illegal due to its bias to conventional power. In previous auctions, existing generations were awarded the majority of auctions’ capacity. Gas, nuclear, oil, and coal were the main fuel types. Demand Side Response share was 2.39% in T-4 for 2021/22 and 7.45% in T-1 for 2018/19.

CM has excluded dispatchable generation such as wind and solar from participating in the auctions. And has introduced new derating factors for battery storage. All these factors escalated the criticism of the scheme.

However, CM has issued this summer a ‘call for evidence’ in order to review CM rules. It had mentioned in the document that ‘desirable’ changes may take place to enhance CM and to make it inclusive of renewable energy technologies and hybrid capacity.

CM rules were clearly not designed to promote renewable energy but to guarantee the security of supply. However, the process to achieve that should have been fair to all participants regardless of the technology used or the fuel type and adequate rules should have been put in place to guarantee that.

BEIS is trying to secure the separate state aid for the upcoming auctions and is in the process to re-obtain approval for the state aid which might be granted after an investigation is carried out by the EC.

The court ruling can be justified for stopping future auctions but halting payments for existing agreements has negative implications on the market. Investors are worried about the losses this ruling might cause. And subsequently, contractual agreements that guarantee developers right to payments hold the UK government and the EC accountable for breaching the terms.

This dilemma could have been avoided had the BEIS reviewed CM earlier and made the necessary changes to guarantee fairness of opportunity. We doubt that CM will be entirely terminated. And even if the court does not change its ruling, the Brexit might give the UK a sole call to resume payments and go on with future auctions.

Despite the lucrativeness of CM for investment, other schemes like STOR and Contracts for Difference (CfD) have a high chance of being pushed forward on a larger scale by the government to maximise energy generation and its effectiveness. This can give a chance for emerging clean technologies and dispatchable renewable energy to contribute to the security of energy supply and decarbonization.